Taylor's University

Undergraduate Business Programs

Business Law (LAW60104)
Lecture 12 Company Law

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 Contents
• Introduction
• Formation of companies
• Private and public companies
• Incorporation of companies
• Separate legal personality
• Piercing the veil of incorporation
at common law
• Doctrine of ultra vires
• Directors & their duties

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 Application for Incorporation
s.14 Companies Act 2016-
(1) A person who desires to form a company shall apply
for incorporation to the Registrar
(2) A company shall not be formed for any unlawful
purpose
(3) The application for incorporation under this section
shall include a statement by every person who
desires to form a company containing the following
particulars:
(a) name of the proposed company
(b) the status whether the company is private or
public
(c) the nature of the business of the proposed
company
(d) registered address

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 (e) the name, identification, nationality and the
ordinary place of residence of every person who is
to be a member of the company
(f) the name, identification, nationality and the
principal place of residence of every person who
is a director
(g) the name, identification, nationality and the
principal place of residence of the secretary
(h) in the case of a company limited by shares,
the details of class and number of shares taken by
a member
(i) in the case of a company limited by
guarantee, the amount up to which the member
undertakes to contribute to the assets of the
company in the event of its being wound up; and

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 Types of companies
s.10 (1) A company may be incorporated as:
(a) limited by shares – members’ liability limited to
amount of unpaid on their shares;
(b) limited by guarantee – member’s liability to amount
they guaranteed to contribute in the event of
winding-up of the company. e.g. clubs, associations;
(c) unlimited company – no limit to members’ liability.
s.11 Companies Act 2016
(1) A company limited by shares shall either be a
private company or public company;
(2) A company limited by guarantee shall be a public
company
(3) An unlimited company shall either be a private
company or a public company.

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 Certificate of Incorporation
s.17 Companies Act 2016 - Upon the application by a
company and on payment of a prescribed fee, the
Registrar may issue to the company a certificate of
incorporation in the form and manner as the
Registrar may determine.

Name of the Company

s.25 (1) the name of the company shall end with the
following:-
For a public company, the word “Berhad” or the
abbreviation; “Bhd”
For a private company, the word “Sendirian Berhad”
or the abbreviation; “Sdn Bhd”
For an unlimited company, the word “Sendirian” or the
abbreviation; “Sdn”

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 Effect of Incorporation
s. 18 (1) upon the date of incorporation specified in the
notice of registration issued under s.15, there shall be
a company by the name and registration number as
stated in the principal register kept by the Registrar
for this purpose.
s. 18 (2) Every person whose name is stated as a
member in the application for incorporation and on the
incorporation of the company shall be entered as
members in the register of members, together with
such other persons who may become members of the
company from time to time, are a body corporate by
the name stated in the notice of registration.
s.18 (3) In the case of a company having share capital,
every person whose name is stated in the application
for incorporation becomes the shareholder as
specified in the application.

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 Separate Legal Entity
s. 20 A company incorporated under this Act is a body
corporate and shall –
(a) Have legal personality separate from that of its
members; and
(b) Continue in existence until it is removed from the
register
A company assumes a separate legal personality of its
own – distinct from its members i.e. directors and
shareholders. This was first established in the case of
– Salomon v Salomon & Co. [1897] AC 22
Followed by
Lee v Lee’s Air Farming [1961] AC 12

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 Piercing the Veil of Incorporation
Courts have lifted/pierced the corporate veil where
company has:
• been used as vehicle for fraud -Re Darby[1911] 1
KB 95
Darby and another who were bankrupts set up co.
in channel islands. co. promoted another co. to
which it sold its property and made substantial
profit. The latter co. went into liquidation.
liquidator claimed profits made by Darby as
promoter.
Court: Where co. used for perpetrating a fraud,
corporate veil will be lifted to reveal Darby as real
promoter and claim from profits made.

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 Piercing the Veil of Incorporation
Company used as a sham -
Gilford Motor Company Ltd v Horne [1933] Ch 935
Former employee who was bound by agreement not
to solicit customers from his former employers set up
a company to do so. He argued that while he was
bound by the agreement, the company was not. Court
found company was a front for employee.

Jones v Lipman [1962] 1 WLR 832

Lipman entered into contract with Jones for sale of
land. Lipman changed his mind and did not want to
complete sale. He formed company and transferred
land to company to avoid the sale. He claimed he
could not complete sale because he did not own the
land anymore. Judge found company was façade for
Lipman and granted specific performance.

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 Piercing the Veil of Incorporation - statute

s.539(3) – if in the course of a company or in any

proceedings against a company an officer of the
company who knowingly was a party to the
contracting of a debt had, at the time the debt was
contracted, no reasonable or probable ground of
expectation, after taking into consideration the other
being able to pay the debt, commits an offence and
shall, on conviction be liable to imprisonment for a
term not exceeding five years or to a fine not
exceeding five hundred thousand ringgit or to both.

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 Piercing the Veil of Incorporation - statute
s.540(1) – if in the course of winding-up of a company
or in any proceedings against a company it appears
that any business of the company has been carried on
with the intent to defraud the creditors of the company
or creditors of any other person or for any fraudulent
purpose, the Court on the application of the liquidator
or any creditor or contributory of the company, may, if
the Court thinks proper to do so, declare that any
person who was knowingly a party to the carrying on
of the business in that manner shall be personally
responsible, without any limitation of liability, for all or
any of the debts or other liabilities of the company as
the Court directs.

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 Piercing the Veil of Incorporation - statute

s.540(2) – where a person has been convicted of an offence

under subsection 539(3) in relation to the contracting of such a
debt as is referred to in that section, the Court on the
application of the liquidator or any creditor or contributory of
the company may, if the Court thinks proper so to do, declare
that the person shall be personally responsible without any
limitation of liability for the payment of the whole or any part of
that debt.

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 Piercing the Veil of Incorporation - statute
s.541 (1) – if in the course of winding up it appears that –
(a) Any person who has taken part in the formation or
promotion of the company; or
(b) Any past or present liquidator or officer;
has misapplied or retained or become liable or accountable
for any money or property of the company or been guilty of
any misfeasance or breach of trust or duty in relation to the
company, the Court may, on the application of the liquidator
or of any creditor or contributory examine into the conduct
of that person, liquidator or officer and compel him to repay
or restore the money or property or any part of the money
with interest at such rate as the Court thinks just, or to
contribute such sum to the assets of the company by way of
compensation in respect of the misapplication, retainer,
misfeasance or breach of trust or duty as the Court thinks
just

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 OBJECTS CLAUSE
Common Law - Companies can only engage in
activities listed in objects clause of MOA. If the
company engages in activities outside objects, they
would be acting ultra-vires i.e. beyond its powers.
Problem – 3rd parties who deal with company would
not know if activity engaged in is within or outside
objects clause.

s.35(1) subject to the provisions of this Act, the

constitution of a company may contain provisions
relating to: (a) the objects of the company
s.35(2) for the purposes of paragraph (1)(a), if the
constitution sets out the objects of the company-
(a) The company shall be restricted from carrying on
any business or activity that is not within those
objects;
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 DIRECTORS
s.196 (1) - company shall have minimum number of
directors as follows:
(a) in the case of a private company, one director;
or
(b) in the case of a public company; two directors
(2) a director shall be a natural person who is at
least eighteen years of age.
s.198 (1) a person shall not hold office as a director
of a company or whether directly or indirectly be
concerned with or takes part in the management of
a company, if the person –
(a) is an undischarged bankrupt
(b) has been convicted of an offence relating to
the promotion, formation and management of a
corporation
(c) has been convicted of an offence involving
bribery, fraud or dishonesty
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 Types of directors
➢ Managing director – in charge of day to day management of
company
• Non-Executive Director – Not involved in management of
company & not employees of company. They are impartial to
decision-making of board.
• Chairperson – Chairs meetings of directors. Governs its
conduct. Signs the minutes.
• De facto director – acts as a director but not validly appointed
as one.
• Shadow director – not validly appointed as director but co.
officers take his instructions.
• Nominee director – appointed to represent interest of a group of
people e.g. creditors, bankers, shareholders.

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 DIRECTORS – Appointment & Removal
Appointment –
s.203(1) – at a general meeting of a public company, a
motion for the appointment of two or more persons as
directors by a single resolution shall not be made
unless a resolution that the motion shall be so made
first been agreed to by the meeting without any vote
being given against it.
Removal –
s. 206(1) – a director may be removed before the
expiration of the director’s period of office as follows:
(a) subject to the constitution, in the case of a private
company, by ordinary resolution; or
(b) in the case of a public company, in accordance
with this section

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 Directors Duties
• At common law, duties of directors divided into 2 broad
categories:
– Fiduciary duty to the company
• Duty to act in good faith in the interests of the
company
• Duty to act for proper purpose
• Duty to avoid conflicts of interest
– To exercise reasonable care, skill and diligence
• Act bona fide in interest of the company for a proper
purpose. Duty to act for the company and not any
individuals in the company.
• When co. is insolvent, directors have a duty not to
prejudice the interests of creditors.
• Directors should owe duty to stakeholders e.g. Employees,
customers & suppliers, the environment, regulators and
other government agencies, broader community.
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 Directors’ fiduciary duties – Improper purpose
Issuing shares for purpose of creating new majority within the
co. to gain control even if directors honestly believe their act
is in best interest of co.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC
Ampol Petroleum and Bulkships Ltd together owned 55% of
shares (majority) in R W Miller (Holdings) Ltd. Ampol and
Howard Smith Ltd were competing to takeover Miller.
Directors of Miller favoured Howard Smith’s bid, which was
higher, but Ampol and Bulkships would not have accepted
Howard Smith’s offer. Miller needed further capital. Directors
of Miller decided to allot new shares to Howard Smith for 2
purposes; to raise capital needed, and to reduce holdings of
Ampol and Bulkships so Howard Smith’s can succeed. Ampol
challenged validity of allotment.
Court: allotment was not valid. Its dominant purpose was to
alter balance of power, and this was not the purpose for which
director’s power to allot shares had been given.
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 Directors Common Law duties
-conflict of interest
- Must not allow a situation where there is conflict
between duties to company and personal interests.

- must act in the interest of the company and not

their own interest.

- must disclose interests in a transaction and obtain

shareholder approval at GM

- must not make improper profits

- must not put themselves in position where they

may act in their own interests - even if no profit
made, co. did not suffer any losses & contract was
fair.

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 Directors Common Law duties -conflict of interest

i) Regal (Hastings) Ltd v Gulliver [1942] 1 ALL ER 378

Held: -Directors are fiduciary and is not allowed by equity to
profit from his position.

ii)Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461

The Facts: -The company entered into a contract to purchase
goods from a business in which one of the Directors was a
partner.
Held: - The contract was void.
‘Conflict’ arose when the company enters into a contract,
arrangement or transaction in which a director has interest
in, and that director does not disclose his interest to the
company.

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 Directors Common Law duties -conflict of interest
iii) Furs Ltd v Tomkies [1936] 54 CLR 583
Tomkies was MD of Furs and expert at tanning of pelts. He
knew secret formula used for these processes. He was
authorised to negotiate sale of business and formulae to FD.
During negotiations, FD told Tomkies they would purchase the
business if Tomkies worked for them. He agreed and disclosed
formulae. FD bought the business for lesser price minus cost
of formulae. Tomkies did not disclose this to Furs. Court: clear
conflict of interest. Tomkies must account to Furs for
undisclosed profit. He was to get best deal for company and
not himself.

iv) Peso Silver Mines v Cropper [1966] 58 DLR (2d) 1

Owner of mine offered to sell it to Peso Silver Mines Ltd.
Peso rejected the offer. Mr. Cropper, member of board,
purchased the claim for himself. Peso sued Cropper for breach
of fiduciary duty for "seizing corporate opportunity".
Court: Cropper not in breach of fiduciary duty to Peso.
directors acted in good faith and in best interests of company
in rejecting the offer. Information Cropper received as board
member was not confidential. it was available to any
prospective purchaser. There was no breach found. 23
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 Directors’ statutory duties

s.213 (1) – a director of a company shall at all times exercise

his powers in accordance with this Act, for a proper purpose
and in good faith in the best interest of the company

s.213(2) – a director of a company shall exercise reasonable

care, skill and diligence with-
(a) the knowledge, skill and experience which may reasonably
be expected of a director having the same responsibilities;
and
(b) Any additional knowledge, skill and experience which the
director in fact has.

s.213(3) – a director who contravenes this section commits an

offence and shall, on conviction, be liable to imprisonment for
a term not exceeding five years or to a fine not exceeding
three million ringgit or to both.

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 Directors’ statutory duties – Business Judgment Rule

s.214 (1) – a director who makes a business judgment is

deemed to meet the requirements of the duty under subsection
213(2) and the equivalent duties under the common law and in
equity if the director-
(a) makes the business judgment for a proper purpose and in
good faith
(b) does not have a material personal interest in the subject
matter of the business judgment
(c) Is informed about the subject matter of the business
judgment to the extent the director reasonably believes to
be appropriate under the circumstances; and
(d) Reasonably believes that the business judgment is in the
best interest of the company

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 Directors’ statutory duties

s. 218 (1) – a director or officer of a company shall not,

without the consent or ratification of a general meeting—
(a) use the property of the company;
(b) use any information acquired by virtue of his position as a
director or officer of the company;
(c) use his position as such director or officer
(d) use any opportunity of the company which he became
aware of, in the performance of his functions as the director
or officer of the company; or
(e) engage in business which is in competition with the
company,
to gain directly or indirectly, a benefit for himself or any other
person, cause detriment to the company.

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 Directors’ statutory duties
s. 221 (1) – subject to this section, every director of a company

who is in any way, whether directly or indirectly, interested in

a contract or proposed contract with the company shall, as
soon as practicable after the relevant facts have come to the
director’s knowledge, declare the nature of his interest at a
meeting of the board of directors.

s.222 (1) – subject to section 221, a director of a company who is

in any way, whether directly or indirectly, interested in a
contract entered into or proposed to be entered into by the
company, unless the interest is one that need not be disclosed
under section 221, shall be counted only to make the quorum
at the meeting of the Board shall not participate in any
discussion while the contract or proposed contract is being
considered during the meeting and shall not vote on the
contract or proposed contract.

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 Directors’ statutory duties

s. 223 (1) – notwithstanding anything in the constitution, the

directors shall not enter or carry into effect any
arrangement or transaction for—
(a) the acquisition of an undertaking or property ofa
substantial value; or
(b) The disposal of a substantial portion of the company’s
undertaking or property unless-
(i) the entering into the arrangement or transaction is
made subject to the approval of the company by way of a
resolution; or
(ii) the carrying into effect of the arrangement or
transaction has been approved by the company by way of a
resolution.

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